So, you are starting to eye your retirement, Congratulations on approaching the end of the marathon that we call working! Many people believe they should draw their CPP benefits as soon as they are able. The main reason retirees opt to receive CPP right at 60 years of age is that they financially require the funds. Not everyone will have the option to defer their CPP, either due to financial need, forced early retirement or shortened lifespan. The ability to defer their CPP payments can be considered a luxury, BUT for those who are still working or those who can be flexible, there are numerous benefits to deferring the CPP out to age 65 or even longer. When you start to review your sources of retirement income don't discount the strength and viability of the Canada Pension Plan (CPP).
Starting in 2021, CPP will be enhanced by increasing the contribution rates for employee and employers from 5.25% to 5.45%. This means increased benefits for retirees from their CPP in the future.
Many people fear they may pass away early and want to leave as much of their family assets intact for their survivors (both their spouse and/or children). This way of thinking is the result of something called "availability bias" which causes us to base our expectations on events which make a big impression, rather than routine events. The reality is that most people believe their greatest risk with retirement is dying early, when really, the greater risk is the opposite, that you will live beyond the lifetime of your savings.
Another reason people believe they should claim CPP as soon as possible is because they think it is better to start benefits when you can enjoy them while you are still fit and active. The underlying assumption is that getting more money later is less attractive because you will be slowing down and spending less. As you age, recreational spending may decrease but the cost of medical care will increase, and to be clear, the cost of medical care is far greater than any leisure spending you may consider.
If you are going to be receiving a pension income upon retirement, one that has a "bridge benefit", you may be an ideal candidate for waiting to draw your CPP. A bridge benefit is usually paid to you until age 65 and then it drops off. If you wait until age 65 to draw your CPP your taxable income will be lower as the bridge will end and then you start to receive your full CPP. If you draw your reduced CPP along with your pension and bridge income you will be susceptible to greater taxation earlier in your retirement.
If your spouse doesn't have the same kind of pension income that you have, again, you may be another ideal candidate for waiting to draw your full CPP. Your pension income may have a survivor benefit that is significantly less and your spouse will benefit from a higher CPP survivor benefit that will only occur if your original CPP was higher.
These are some of the reasons for why drawing your CPP early may not be in your best financial interest, but what are the tangible benefits of waiting? Believe it or not, an actuary's analysis of the benefits of delaying has determined that, on average, you could receive $100,000 more in lifetime retirement income by starting the Canada Pension Plan at 70 rather than 60. Every year that you claim CPP benefits before your 65th birthday, your total amount is reduced by 0.6% per month which works out to be 7.2% per year. If you wait until you are 70, your payments will have increased by 42%. The current yearly maximum amount at age 70 is over $20,000!
There are many strong arguments to waiting to take your full CPP as part of your retirement strategy. If this article has piqued your interest then drop us a line. Every retiree's situation is unique and you deserve to have all the information about what is best for you.
